Euro recovers on rising bets ECB may unwind stimulus
The euro stayed near two-week highs against many of its rivals on Thursday, on rising bets the European Central Bank (ECB) may soon announce it will start winding down its massive bond purchase program.
The central bank’s chief economist Peter Praet, a close ally of President Mario Draghi, said the ECB would debate next week whether to end bond purchases later this year.
Jens Weidmann, the head of Germany’s central bank, said expectations the ECB would taper its bond-buying program by the end of this year were plausible while his Dutch counterpart, Klaas Knot, said there was no reason to continue a quantitative easing program.
The trio of comments drove the euro to a two-week high of $1.1800 sharp. The common currency last traded at $1.1781 EUR=, extending its gains so far this week to 1.15 percent.
The euro strengthened against other currencies, hitting a two-week high of 1.1640 Swiss franc EURCHF= and 129.83 yen EURJPY= on Wednesday.
“In the near term, we are likely to see event-driven trading on the euro. We should expect the euro to jump 100 pips (one cent) quite easily on comments from key officials,” said Kyosuke Suzuki, director of forex at Societe Generale.
The ECB has been debating whether to end the unprecedented 2.55 trillion euro ($2.99 trillion) bond purchase program this year as the threat of deflation has passed.
Still many market players were surprised by the flurry of comments as they had thought uncertainty caused by a political crisis in Italy could make policymakers cautious about indicating an end to stimulus at its policy meeting on June 14.
Indeed, the yield spread of Italian debt to German Bunds widened on Wednesday as Italian bonds are seen as the biggest beneficiary of the ECB’s buying.
“This euro buying is essentially short-term trade. People don’t know when Italian debt problems will be solved but they do know when the ECB might announce an exit from stimulus,” said Mitsuo Imaizumi, chief currency strategist at Daiwa Securities.
“So speculators are bidding up the euro ahead of the meeting next Thursday. I bet some of them will aim to take profits before the event. The same can be said for the dollar/yen as they are buying the dollar ahead of the Fed’s meeting,” he added.
The Federal Reserve is widely expected to raise interest rates for the second time this year on Wednesday.
The dollar hit a two-week high of 110.27 yen in late U.S. trade on Wednesday before giving up gains in Asia, likely related to the selling in Aussie/yen, to trade at 110.01 yen JPY=, down 0.15 percent on the day.
The Australian dollar dipped 0.15 percent against the dollar to $0.7655 AUD=D4, off a 1-1/2-month high of 76.77 cents touched on Wednesday, underpinned in part by the country’s strong economic growth data published on Wednesday.
The improving market mood on the back of easing worries about Italian politics and the strength of high-tech shares has supported high-beta currencies such as the Australian dollar and has weighed on a low-yielding yen for the past week.
But many investors are cautions on making big bets due to uncertainties over trade frictions, given U.S. President Donald Trump looks set to clash with other Group of Seven leaders at their weekend summit in Canada.
courtesy : .reuters.com
photo : Dreamstime.com
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